Question 3 (Total 16 marks) Pastry Ltd. sells puff pastry and spring rolls to grocery stores across Australia and has two divisions (Puff division and Roll division) that are separately responsible for the selling of the puff pastry and spring rolls, and each are treated as profit centres, Maximum capacity of the Puff division is 1,000,000 packs of puff pastry per month, and it currently sells 800,000 packs per month to external customers. Below is the operating result of the Puff Division from the sales to external customers for a month: Sales revenue $3.200.000 Variable cost $1,600.000 Contribution margin $1,600,000 Fixed costs $600,000 Gross margin $1,100.000 The Roll division is planning to expand its product range to also include sausage rolls and therefore requires 200.000 packs of puff pastry for the coming month. Roll division's manager has contacted external suppliers of puff pastry and the cheapest quote the manager obtained was $4.50 per pack. The Roll division manager is now having discussions with Puff division's manager regarding the possibility of purchasing the puff pastry from the Puff division. Required 1. If Pastry Lid. uses the cost-based transfer pricing policy for the transfer of products across its profit centres, what transfer price would the two divisions use? Is the transfer likely to occur? Why or why not? 2. If Pastry Lid. uses the cost-plus-based transfer price approach with a 40% mark-up instead, what transfer price would the two divisions use? Is the transfer likely to occur? Why or why not? 3. Assume that Puff division is expected to operate at maximum capacity in the coming month to meet the increased demands of its external customers at the current market price. What transfer price will the Puff division accept to transfer the puff pastry to Roll division? Is the transfer likely to occur? Why or why not? 4. Assume that Roll division's sausage roll launch has been successful, and sales demand has increased in the second month after its launch and therefore the Roll division wants to buy 300,090 packs of puff pastry from Puff division for that month. What would be the minimum transfer price that Puff division can transfer its puff pastry to Roll division if it is expected to sell 800,000 packs to its external customers that month? Is the transfer likely to occur? Why or why not? (4+ 4 +4 + 4 = 16 marks) Start typing your answer from here